Con Keating Weighs In About Pension Liability Valuation

I had the pleasure of meeting Mr. Con Keating a few years ago when I visited London on business. We had been introduced by the then CEO of a UK-based pension consulting firm who knew of our mutual interest in governance. Since that time, Mr. Keating has been consistently generous with his views about real problems faced by retirement plan fiduciaries. This is no small gift given the breadth and depth of his experience as an advisor, investment manager, board member and academic. Click here to read Con Keating's bio.

In response to my August 5 essay entitled "Valuing Public Pension Fund Liabilities" and a request for feedback from industry practitioners, Mr. Keating sent an interesting paper from 2013 that I have finally been able to read. Entitled "Keep your lid on: A financial analyst's view of the cost and valuation of DB pension provision," he joins co-authors Ole Settergren and Andrew Slater in advocating for the use of a pension's Internal Growth Rate ("IGR") as the appropriate discount rate to adopt for purposes of reporting the financial health of a defined benefit ("DB") plan. To do otherwise would "lead to over or under estimates, bias and volatility," in part because exogenous metrics such as a risk-free rate "do not reflect scheme arrangements and dynamics." Instead, this analytical trio offers up the IGR as the only benchmark that adequately considers contributions and the concomitant impact on obligations. As they importantly point out, similar to the message of their U.S. peers, getting an accurate valuation is essential as it drives other key economic outcomes such as potential tax hikes levied to fund government pension plans in deficit. Applied to corporate plans, bad pension valuations can lead to a diminution of enterprise value. This is something I addressed at length in my Journal of Corporate Treasury Management article entitled "Pension risk, governance and CFO liability." (My current affiliation is Fiduciary Leadership, LLC.)

The issue of valuation is far from trivial. According to Pensions & Investments, the Society of Actuaries will soon publish a paper that looks at alternative ways to assess public plan liabilities, "reversing a previous position prohibiting any release of the paper."

Stay tuned for more discussions about how to evaluate funding gaps. As I've long maintained, if you can't measure something, you can't manage it.

Valuing Public Pension Fund Liabilities

In 2006, I penned "Will the Real Pension Deficit Please Stand Up?" as a way to draw attention to the urgent need to understand what reported numbers mean. Ten years later, questions remain about how best to measure defined benefit plan obligations. This is not a good situation, especially now when more than a few retirement plans are struggling. Click to review Governing.com's pension liability and funded status data for eighty plans.

Authors of a Citigroup paper entitled "The Coming Pensions Crisis" urge transparency regarding "the amount of underfunded governmental pension obligations." I concur but the challenge is knowing what information should be disclosed so that legislators, policy-makers, taxpayers and plan participants have confidence in what gets shared. I have often written that is hard to manage a problem if one cannot adequately measure the problem. 

In early July, Pensions & Investments' Hazel Bradford wrote about the Competitive Enterprise Institute's suggestion to use a "low-risk discount rate" tied to U.S. Treasury bond yields. Critics counter that this would grossly inflate the size of a deficit and perhaps lead to inappropriate actions. On August 3, it was reported that two actuarial groups disbanded a task force over the topic of how to best value public pension fund liabilities. (In terms of full disclosure, I co-authored a paper in 2008 with one of the groups mentioned, the Society of Actuaries. Click to read "Pension Risk Management: Derivatives, Fiduciary Duty and Process.")

As someone who has been trained as an appraiser, taught valuation principles and rendered opinions of value or reviewed those of others, I know firsthand that reasonable people can differ about inputs and assumptions. I likewise understand that snapshot pension debt levels do not necessarily convey a message about current or ongoing liquidity, debt capacity or the ability to tax. The goal is to reconcile differences so that anyone making decisions based on valuation numbers understands their strengths and weaknesses. 

Given the goal of this blog Pension Risk Matters to educate and share helpful information about the global retirement industry and investment risk governance, I welcome input from knowledgeable appraisers, accountants and actuaries. If you are interested in being interviewed or writing a guest blog post, please kindly email contact@fiduciaryleadership.com.

Pension Transparency In A Digital World

Intrigued after reading "Colorado turns to Twitter to recruit pension board members" by Meaghan Kilroy (Pensions & Investments, February 23, 2015), I spent some time exploring the various social media sites for the Colorado Public Employees' Retirement Association ("PERA"). Recruiting Tweets can be found by clicking here. There is also a video at www.copera.org about "Serving as a PERA Trustee" for the $44 billion system that covers 500,000 individuals. Viewers learn about guardian-type investment oversight duties that include loyalty, prudence and care. A more traditional information sheet entitled "Serving As A PERA Trustee: Factors to Consider" describes what trustees do, their fiduciary responsibilities, the composition of the PERA board, educational requirements and typical time commitment.

Elsewhere, whether part of its blog, Twitter site, You Tube channel or main website, there are numerous pronouncements about financial performance, new investment offerings, videos about retirement planning, calculators and Town Hall meetings.

One Twitter post that particularly caught my eye linked to a February 20, 2015 news item entitled "Colorado PERA: Best Practices Leader." Besides letting readers know that the Board of Trustees had hired Milliman, Inc. to conduct a review of PERA's actuary, a hyperlink maps to the May 2014 recommendation of the Government Finance Officers Association ("GFOA") that pension plan fiduciaries "exercise prudence" in selecting and monitoring service providers such as actuaries. The cherry on top of the cake, in terms of transparency and easy access to information, comes in the form of an embedded link to the Milliman audit report as well as to the response from PERA's actuary, Cavanaugh Macdonald Consulting, LLC.

Having spent considerable time in reviewing the use of social media by retirement industry service providers and plan sponsors for several clients, I was happy to learn about the Centennial State's commitment to knowledge-sharing. While I cannot attest to the details of PERA's structure, its investment program and other elements of governance by examining internet properties alone, it does appear that this public plan sponsor is focused on regularly communicating with its participants, retirees and vendors.

Given a plethora of negative headlines about pension plans (public and corporate), shedding light on critical issues by any sponsor will likely be seen as a smart thing to do. This assumes that information provided to various constituencies is clear, accurate and helpful. A talented digital media professional can play a vital role by ensuring that a steady flow of content gets disseminated. Beyond that, he or she needs to engage with the intended target audience(s), solicit their feedback on an ongoing basis and make recommendations to a plan sponsor (or service provider) as a result. Compliance or confidentiality restrictions have to be taken into account. Avoiding complexity is another challenge that competes with the need to avoid being "too cute" and thereby coming across as trivial.  The list of "must do" tasks is long when an organization decides to craft a communications strategy that relies on new technology. Quantity is the not the same as quality and the use of social media can be counterproductive if not adopted with care.

Plan sponsors and financial service providers may have no choice but to join cyberspace colleagues as the use of services such as Twitter, LinkedIn and Facebook continue to gain popularity. See "Social Media Used By 71% Of Retirement Plan Participants, Survey Says" (Financial Advisor, September 26, 2013).